Microsoft Should Have Let Google Have Search To Itself

Yesterday, Yahoo blamed Microsoft for its declining search business, saying that last year's deal to outsource search advertising had lowered revenue per search.

The implication: Microsoft's adCenter platform is delivering less relevant ads than Yahoo's old platform, so users are clicking on fewer ads.

That may not be entirely true. As search expert Danny Sullivan points out, Yahoo's search revenues were declining long before the Microsoft deal kicked in. At least some of the continued decline may have to do with how Yahoo displays search results or ads on its site.

Combined market share for Bing plus Yahoo is now above 30% -- that's back to where Yahoo was on a standalone basis way back when Microsoft got into the business in 2005.

But quarter after quarter, year after year, Microsoft's consumer online business shows increasing losses -- mostly due to search -- and no gain in revenue.

At the end of 2010, Microsoft's Online business had trailing-four-quarter sales of $2.3 billion. That's EXACTLY the same trailing-four sales it had at the end of 2006. Four years. No growth.

Over the same period, the Online segment's trailing-four-quarter operating losses have ballooned from $400 million to $2.5 billion.

You read that right: Microsoft's consumer online business now has operating losses higher than its revenue. That's been the case for the last year or so, thanks in large part to expenses from the Yahoo deal.

(A technicality: the precise makeup of the Online business segment has changed since 2006, with some businesses like Windows Live being reallocated to other segments. But search has been there all along and the basic trend is the same -- a non-material effect on revenue and huge increases in expenses.)

Skeptics might argue that it doesn't matter -- perhaps Steve Ballmer never actually intended to make a ton of money at search. Perhaps he only wanted to put competitive pressure on Google. He saw that Yahoo would never be able to keep up, so he decided to enter the market in a big way, at one point nearly risking a $40 billion acquisition of Yahoo simply to get its search business out of the way.

On nearly every metric that matters, Google has continued to shine, year after year, quarter after quarter. Overall revenue, search revenue, revenue per search -- you name it. They're all going up. The only area where Bing has had any effect at all on Google is search query market share in the U.S.

The ironic part about that is, if Microsoft had just stayed out of the search business entirely and let Google eat Yahoo by itself, Google would be a lot closer to monopoly share. Which means that antitrust regulators in the U.S. -- who are already taking a close look at Google's search practices -- would have had a much clearer mandate to investigate.

That's nice for consumers. And Bing actually beats Google in some areas, like travel and music search.

But eventually, a business strategy is supposed to create financial value for the company and its shareholders. Microsoft has been at this game for eight years now -- it started building MSN Search from scratch in 2003.